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The Industrial Revolution: Redux

Market reports indicate that drug and device manufacturers have been adapting traditional models, trending toward heavier usage of contracted suppliers of critical functions such as manufacturing (CMOs) and research (CROs). Trends suggest that this will continue over the next decade. A review of figures for the last decade reveal that outsourced manufacturing by pharma and biopharm companies currently generates 50B USD in sales annually, a figure that has been rising by over 10% annually.

Companies of all sizes and shapes in these challenging economic times are consistently incentivized to do more with less. Mergers and consolidations also present an obvious opportunity to restructure and evaluate options.

The following factors are currently acting as significant drivers of transition from the traditional pharmaceutical, bio-pharmaceutical, and medical device business models to a model that relies more heavily on contracted quality partners:

The rising cost associated to the development – to-market cycle (Cost to Market), generic competition, and dwindling pipelines:

Currently, the investment required to develop a therapy, to conduct associated clinical trials, and gain licensure is peaking at 3 billion USD, averaging at an investment of 800 million USD. Since R&D requires such a significant investment, and only 1 in 5000 new chemicals become a new drug, these pre-profit costs only return their investments about 30% of the time. Additionally, relevant to the trend, is the unprecedented impact impending patent expirations are about to have on this industry. Patents on drugs expiring in 2011 include 10 medicines that have produced over $50 billion in combined annual sales. These facts are forcing manufacturers to reassess their distribution of resources, dictating a need to direct more of their resources to R&D and to shift them away from manufacturing.

Pressure from insurers and government to keep prices low:

The impending implementation of government funded health care in America could result in a reduction of recoupable unit cost for medical therapies. This is a deviation from free market mechanisms, which have traditionally related unit cost to price of development and production and demand. Price setting, which is inevitable under such a plan, now forces companies to back calculate and attempt to limit the cost of production to what can be recouped in a controlled market place.

The Global Market Place offers low cost options:

There are many countries that have adapted tax structures to encourage migration of capital and industry. Some of those are near American borders have an educated work force and significantly reduced labor and operating costs. However, the costs associated to moving in to these areas when tax incentives are put into place, as well as the costs associated to moving out when they eventually expire, is significant. All of us who spent any time in Puerto Rico in the 90s, can see in this decade, how quickly these tax incentives can cause a boom, and how quickly the pendulum swings in the opposite direction. These facts leave large multi-national corporations reluctant to own remote facilities. If there is an option to utilize existing facilities that belong to another company, it will be taken.

As is the case with all private sector transactions, there is always a buyer and a seller. The factors above are among the leading drivers of the contracted service buyer. Now let’s look at the unique factors simultaneously acting as drivers to sellers of contracted services:

Available and low-cost real estate:

Corporate mergers/consolidations and relocations have resulted in an uncommon surplus in the industrial real estate market. This is placing modern, fully equipped facilities within the reach of start ups, entrepreneurs, and capital investment groups. This allows a manufacturing space to be purchased and brought on line quickly and efficiently.

Down sized executives and middle managers:

The same economic trends that have caused the supply of low cost and valuable real estate to increase have caused many talented and experienced leaders and managers to contemplate their immediate futures. These type of resources have been down-sized and some given sizeable separation packages, allowing them time to contemplate new ventures and providing them capital to invest in their own futures. This demographic often represents resources that are highly educated, experienced, and motivated professionals. These people have learned through experience what to do and what not to do, and they have also learned that the multi-nationals that once offered the most secure future are, today, no more secure than small to mid-sized organizations.

High unemployment:

The general trends in unemployment have significantly increased the supply of well-educated resources that are eager to work, even with the more moderate compensation packages offered by smaller companies. This makes staffing a new facility easier and faster than ever.

The drivers having an impact on both sides of this sector of industry have resulted in the rise of contacted manufacturing and research services, a very effective, market-driven solution taking advantage of:

Motivated leaders and managers with access to suitable real estate

An experienced and available work force

Capital investors seeking low-cost investments with a high potential return on their investment

Large multi-nationals motivated to shed their resource commitment to manufacturing and move it quickly into expansions of R&D efforts

Low-cost foreign work forces and facilities

These drivers and demographics have produced a growth rate in the industrial sector so far above the norm for the times that we have not seen its equal since the heydays of the industrial revolution:

CMO Growth:

Forecasts of the proceeds for contract manufacturing worldwide indicate that the total annual sales will reach over $60 billion in 2016 and double between now and 2021. This growth is predicted to come from developed market-based pharmaceutical companies; manufacturing of finished dosage forms alone is expected to show a compound annual growth rate of 8.7% between 2010 and 2016.

CRO Growth:

Forecasters estimate that companies can realize 60-70% reduction in discovery research and clinical trials by turning to a CRO. As a result, CROs are projected to realize a 12% increase in service sales by 2017.

Conclusion

Evolution of the marketplace may be the only true certainty in the marketplace. Traditional models will be replaced as leaner, more efficient models emerge. In light of the revolutionary movement (in progress and on the horizon) toward contracted services to big Pharma, the most evident challenge to the industry is the preservation of quality and control.

Our August blog, “Inspection and Enforcement Trends: How Well Do You Know Your CRO?” highlighted the importance of “identifying deficiencies in CROs prior to utilizing their services, and …maintaining oversight of the activities once they have begun.” Establishing effective programs to audit CMOs and CROs, as well as programs designed to promote control and oversight, are valuable first steps to managing this transition and positioning both the sponsor organizations and contract organizations for success that will serve us all.

The Life Science industry is founded upon the shoulders of, and is still supported by, the most talented innovators on the face of the earth. They will continue to discover and bring to market innovative therapies and innovative business solutions that ensure they reach the market quickly, and at prices that render them widely accessible.

The Quality professionals within the industry are no exception; integrating oversight with remote production will require innovation, creativity, and commitment. We have no doubt they will rise to the occasion and adapt in order to excel!